Thursday, 14 June 2007

Buy-to-let market continues to defy financial logic

I just loved this story from the Telegraph about the buy-to-let housing scam. According to a landlord survey from Bradford and Bingley, the buy-to-let market has never been healthier. It had "defied" higher interest rates and continues to grow.

My favourite quote from the article is "Higher interest rates may have an effect on cash flow but they have no impact on long-term capital returns.". Whoever said that is a financial moron. For the benefit of whoever said it, let me outline in very simple terms how the value of any asset is determined in the long run.

Here goes, idiot: the value of any asset depends on future stream of payments that asset returns, discounted by the interest rate. If the interest rate goes up, the discounted present value of the asset goes down. That is to say, the value of the asset goes down. Or to put it in even simpler terms; if the interest rate goes up, the value of the asset down. So, repeat after me, ten times. little Alice's interest rate mantra:

if the interest rate goes up, the value of the asset goes down

if the interest rate goes up, the value of the asset goes down

if the interest rate goes up, the value of the asset goes down

if the interest rate goes up, the value of the asset goes down

if the interest rate goes up, the value of the asset goes down

if the interest rate goes up, the value of the asset goes down

if the interest rate goes up, the value of the asset goes down

if the interest rate goes up, the value of the asset goes down

if the interest rate goes up, the value of the asset goes down

if the interest rate goes up, the value of the asset goes down

So why is it that on some rare occassions, some assets go up when interest rates rise. Simple. There are some people out there who don't understand what they are doing. They haven't repeated little Alice's interest rate mantra ten times. So shall we repeat it again ten times? Nah, do it on your own. I am sick of saying it.

Today, we find these people buying buy-to-let properties. So if you are in a dire need of ridding yourself of an unwanted property, get yourself a buy-to-let landlord. However, don't teach them the interest rate mantra......

Buy-to-let market defies the 'slowdown'

Higher interest rates "have no impact" on the long-term health of the buy-to-let market, a new survey by Bradford and Bingley claims. In the "largest ever" survey of UK landlords since 1996, when Bradford and Bingley were the first to offer a specific buy-to-let mortgage, the group revealed that more than half of landlords plan to increase their property portfolios.

Contrary to reports of overstretched buy-to-let landlords, the survey of almost 5,000 landlords found that only 4pc plan to reduce their portfolio of properties in the next six months. The survey's findings also dismiss claims that buy-to-letters are just in the market for a quick return, revealing that 50pc have been investing for more than five years, and only 7pc have been investing for less than a year.

The current most popular buy-to-let spot is Brighton, with almost a third of landlords owning an investment property in the region. Hailed as the "jewel in the South East's crown", Bradford and Bingley claims Brighton is "enjoying the fastest rate of growth" at the moment, driven by its large student population and close proximity to London. London follows Brighton, as the second most popular buy-to-let area of the UK.

The average landlord is "more Joe Public than Duke of Westminster"; typically male and aged between 36 and 45, with between one and five buy-to-let properties in their portfolios. Only 10pc of the buy-to-let investors surveyed were full-time professional landlords.

"Higher interest rates may have an effect on cash flow but they have no impact on long-term capital returns."

The most popular investment property is the terraced house, with 58pc of landlords questioned by Bradford and Bingley having at least one terraced house in their property portfolio. According to the Council of Mortgage Lenders the average buy-to-let mortgage was £117,548 in the second half of 2006.